For decades, typically large regional or money center banks served as correspondent banks that enabled smaller banks to offer cross-border payments. It was rare for credit unions, community banks, and other smaller financial institutions to offer cross-border payments. And if they did, it was a money-losing proposition, offered out of necessity to prevent their customers from leaving for larger banks.

It’s notable that the problem for originating institutions has become much worse. Over the past decade, the number of correspondent banks supporting originating institutions for cross-border payments has fallen by more than 25%, even as international bank transfer volumes have surged.

Small or even medium-sized financial institutions struggle to find a correspondent bank. And even if one is found—the commercial terms, product issues from the opaqueness of these payments, customer complaints about slow delivery of funds and high fees, as well as service from correspondent banks—make the experience painful for everyone involved.

But things have changed. 

New software and new paradigms address “legacy bank systems”, “legacy product thinking”, and “legacy risk” in terms of cross-border payments.

And for the first time, smaller financial institutions, credit unions, and community banks can offer their retail customers, SMEs, fintechs, and others cross-border payments that are faster, transparent, and less costly than the “big banks”.  Moreover, they’re very profitable as well as easy to implement and support with new paradigms and new tech—and no correspondent bank required.  

In a PaymentsJournal podcast, Gary Palmer, President, CEO, and Chairman of Payall, and Hugh Thomas, Lead Analyst of Commercial and Enterprise Payments at Javelin Strategy & Research, discussed how smaller banks can compete and win in the cross-border space.

Fixing the Root Cause Issues at Correspondent Banks

What could reduce both the risk and the cost of cross-border payments? Fixing manual workflows is the first step. Digitizing and enhancing a correspondent bank’s ability to manage counterparty risk, transaction risk, and multi-jurisdictional compliance lowers the cost of processing each transaction and improves outcomes.

Alternatively, some have introduced stablecoins in an attempt to fill the gap of fewer correspondent banks. But without fixing the underlying risk and compliance issues—they’ve added new risks.

“A professor from a renowned European institution tracking various violations or issues with crypto operators in the areas of sanctions and money laundering has noted a marked increase in violations,” said Palmer. “And even though financial institutions may feel somewhat insulated from risk, this hasn’t been fully tested, and the payment system is exposed to manipulation.”

Payall has developed end-to-end infrastructure and enterprise software for banks of all sizes and all roles, which removes what Gary calls “the fear and friction” from cross-border payments—whether these payments are processed through correspondent banks, new alternatives such as Mastercard Move, or stablecoins.

Hugh Thomas observed: “Smaller banks often lack the technical resources to handle the complex demands of cross-border. What’s notable is how purpose-built solutions digitize these processes, lowering costs and opening participation in ways that weren’t possible before.”

This means that smaller and medium-sized banks can now safely, efficiently, and profitably become correspondent banks or originating institutions.

Banks Are Asking Too Much from Their Employees

Millions of times each day around the world, an originating bank employee receives a payment instruction from their core system indicating that a customer wants to transfer funds to the U.S. to make a payment for goods and services. From here, this transaction is manhandled through an overgrown jungle of paper processes across multiple departments at the originating bank and its correspondent bank.

It’s each bank’s responsibility to establish reasonable risk controls to mitigate money laundering, terrorist financing, and sanctions violations. Based on the size of the payment and other attributes, employees must decide what data to collect—contracts, invoices, bills of lading, customs declarations, tax receipts, or something else. They must then determine whether the documents are authentic or have been altered or forged. And apply judgment to decide if what’s been provided reflects an economically legitimate transaction. The bank employee also looks for sanctioned people, companies, ports, vessels, and products in this pile of documents, from an ever-changing list of sanctions. 

Now consider the time, cost, and risk of error involved—even for a few documents/pages. Multiply that by 5, 10, or 50 pages, and the problem becomes overwhelming.

And where do they record, share, and store the results—along with all the related data, documents, photos, and more? Not in core systems or digital bank platforms—because it’s impossible—but instead, in paper files, shared folders, and emails. What a mess. It’s a slow, costly, opaque, cumbersome, and risky process.

The solution? Digitizing counterparty risk, transaction risk, compliance, and a long list of other previously manual processes eliminates the slow, costly, and error-prone reliance on humans to protect each bank and the payment system.

New, Purpose-Built Software is a Game Changer

“It’s easy to understand how AI and digitization could transform cross-border compliance,” said Thomas. “Software that automates data collection, verification, and document analysis has the unique potential to reduce risk and change the economics of participation for smaller banks.”

Payall’s software digitizes all the originating institution’s rules, data collection, verification, and internal, as well as external, sharing needs. Soon, advanced AI will examine PDFs, audio files, videos, and photos, extract unstructured data—such as names of companies, ports, vessels, people, and currencies—and compare them against sanctions lists.

For the first time, an originating institution, even a small bank, can fully digitize its Know Your Transaction (KYT) process for 100% of transactions in real time. Until Payall, these processes could only be executed by a bank’s employees. It’s too much.  

Also, from the perspective of a correspondent bank working with originating institutions, nothing is more powerful than “see-through”—or 100% visibility into each rule at the originating institution, how it was executed, the supporting data and artifacts, including the results of 3rd party verification services—orchestrated by Payall.

Additionally, correspondent banks configure their individual risk, compliance, or other rules to this incredibly data-rich payment set and take action. Instead of operating on “trust”—validated by occasional audits on as few as 0.0001% of all transactions, months after a payment—imagine the power of complete visibility into the originating institution’s application of their rules, processes, and supporting documentation on 100% of all transactions in real time.

And based on this, the correspondent bank can choose to either accept the payment or independently execute additional transaction due diligence, including a new form of Know Your Customer’s Customer (KYCC). This is only possible with new software that enables instant, on-demand multi-country KYC, KYB, as well as specialty KYT.

What was previously impossible to see is now not only transparent but can be directly and independently interrogated and decisioned by the correspondent bank—this is Know Your Customer’s Customer reimagined. 

This is particularly powerful for correspondent banks that support originating institutions from regions flagged by FATF as having material weaknesses in preventing money laundering, executing KYC, or sanctions screening.

Also, during periods of geopolitical events, bad actors can infiltrate banks. What’s the outcome? In the absence of comprehensive payment data and knowledge, U.S. correspondent banks are compelled to exit from the region or stop just about all payments. But in doing so, legitimate businesses can’t make payments or get paid, and life-saving remittances are stopped. The result? Chaos as commerce is crippled, and everyday citizens struggle to survive. While the bad actors are stopped, a country can be decimated.

“For correspondent banks, Payall enables proactive, data-driven oversight of every transaction, not just retrospective audits or occasional spot-checks. For the first time, correspondent banks can go beyond trust,” said Palmer. “We’ve completely reimagined and redefined Know Your Customer’s Customer so that correspondent banks have 100% see-through into the rules and outcomes of an originating bank partner, and they can directly engage and decision data. This changes everything: it eliminates reliance on inefficient back-office workflows, subjective trust, and guesswork. It creates confidence in the safety of cross-border payments, and gives correspondent banks the control they’ve always needed, but never had.”

Payall’s breakthrough software reduces risk to correspondent banks while ensuring legitimate trade is flowing and the most at-risk can still receive life-saving remittances. “This level of transparency and access fundamentally changes correspondent banking,” noted Thomas. “It’s no longer about faith that a partner executed its controls—it’s about verified execution, visible in real time.”

Correspondent Banks Have New Competition

While new software helps banks overcome legacy systems and legacy risk, Mastercard Move and Visa Direct are new paradigms that address legacy bank product thinking regarding international transfers. Banks and financial institutions of any size can offer cross-border capabilities that no bank has ever offered—such as transfers to mobile money, digital wallets, cash pick-up, and pay to card with Visa Direct and Mastercard Move.

In addition to providing novel software for originating institutions and correspondent banks, having pioneered specialty risk and compliance capabilities as well as end-to-end workflow digitization, Payall is certified by Mastercard Move as a technical integrator and processor. The company also supports Monex and recently announced its FedNow Service certification. Gary emphasized, “We’ll never compete with banks, whether they’re originating institutions or correspondent banks; instead, our software and global payments gateway and orchestration capabilities open more possibilities for all.” 

Mastercard Move and Visa Direct are well-positioned to capitalize on the mass exodus of correspondent banks from cross-border payments in the face of growing retail, SME, and other bank customer demand for cross-border payments. Given the modern, inclusive nature of their products, speed of funds delivery, transparency of payments, and commercial terms for banks—if they can make connecting easy and affordable, major global adoption is likely. Thomas added, “What’s interesting is that new entrants like Mastercard Move and Visa Direct expand payout options, but smaller banks can only plug into them if they have the right software partner. Otherwise, the cost and complexity of connecting make it nearly impossible.”

Palmer agreed, noting, “This is where we shine—banks struggle to find resources to connect and operate with Mastercard Move; we eliminate up to 98% of the capex and can launch a bank on Move in weeks.”

“You Can Do This”

Correspondent banks struggle with effectively and efficiently dealing with the risks associated with how foreign originating institutions, MSBs, fintechs, and other counterparties execute KYC, KYB, AML, and more. But there’s also the financial risk associated with properly maintaining nostro vostro accounts, FBO accounts, or even safeguarded accounts. The ability to perform dynamic sub-ledgering and complex account and currency reconciliation isn’t supported by legacy systems, which rely on manual control mechanisms. This is why banks need new technology to ensure financial integrity, improve outcomes, lower costs, and address the root causes of why cross-border payments have been high-risk, opaque, costly, and slow.

“A good example is a small bank we’re working with. They recognize the gap in correspondent banking and understand that our proprietary software can deliver the safety and efficiency they need to operate and win,” said Palmer. “The opportunities are material but realizing them takes the right technology and bank leadership. Banks can now do this.”

While originating banks have a different set of risk, compliance, and payment problems, new software and new paradigms address their needs, too. And with the likes of Visa Direct and Mastercard Move, there’s no reason for a credit union, community bank, or smaller financial institution to lose a customer just because they don’t offer cross-border payments.    

There’s never been a better time for a bank, even smaller financial institutions, to capture their fair share of cross-border payments—with the right software and know-how.